The paper: “Where Does the Money Go?

Best and Worst Practices in Foreign Aid” written by:

William Easterly and Tobias Pfutze, focuses on “best practices” in the way in which official aid
is given, which is an important component of the future discussions. This paper discuss the
best practice for an ideal aid agency, and with the difficulties that aid agencies face because
they are typically not accountable to their intended beneficiaries. The scope of the paper is to
describe the behavior of aid agencies.
The four dimensions of best practice are considered:
- Specialization
- Selectivity
- Ineffective aid channels
- Overhead costs
Authors divide agencies to bilateral and multilateral ones. And the future comparison of these
agencies shows the four main findings:
1. The data of the aid agency expenditures is very poor. Aid agencies are not transparent.
2. The international aid effort is fragmented along many dimensions. Fragmentation
creates coordination problems and high overhead costs for both donors and recipients.
3. The aid money flow to corrupt autocrats. Existence of ineffective channels like tied aid,
food aid, and technical assistance
4. The authors provide rankings of aid agencies on transparency and different
characteristics of aid practice and one final comprehensive ranking.

The ranks of the different aid agencies are used in this paper to compare the performance of
different aid donors. There ranks or so called indexes are: “Dollar and Levin (2004)” index,
Acharya, de Lima, and Moore (2004) index, and the Commitment to Development Index (CDI).
To describe aid agencies and their transparency the two databases are used: First one is
Development Assistance Committee’s (DAC), and the second one is Credit Reporting System’s
(CRS). As a measure of specialization/fragmentation which reflects market concentration, the
Herfindahl coefficient is used. This coefficient shows that the aid effort is splintered among
many different donors, each agency’s aid effort is splintered among many different countries,
and each agency’s aid effort is also splintered among many different sectors. The most
fragmented donors are Canada, the EC, and the Netherlands. The worst fragmented are the UN
agencies.
The aid should go to the poor countries and not to corrupt and autocratic ones. The paper
shows how much aid goes to corrupt or autocratic countries and how much goes to “nonpoor”
countries, then authors summarize the selectivity of aid agencies in an index, as they seek to
focus on low-income countries while trying to steer clear of corrupt autocrats. Interesting
finding is that Thus, the share of aid which goes to all low-income countries(the least developed
plus other low-income countries) has remained relatively constant since the late 1960s at about
60 percent. Also interesting finding is that the share of aid going to the least developed
countries DO NOT explain the share of aid going to counties run by corrupt autocrats.
The authors had found interesting positive significant correlation between the ranking on
specialization (the Herfindahls) and the ranking on “lower overhead,” with a correlation
coefficient of 0.37. This correlation confirms the intuition that more specialization should lead
to lower overhead costs.
 And in addition to this topic I would like to provide real-life evidence about Foreign Aid and
corruption. In the city where I live (it is in Moldavia), we have the religion called: “The Jehovah's
Witnesses”. And about 8-10 years ago the foreign communities of this religion form USA (or
some other American donors) were providing the aid to Moldavia in form of clothes (second
hand) and dried food. The aid meaning is that it is provided for free to help poor people. But
the people who was in charge to deliver the aid to the poor, started to SELL it, they’ve
developed big networks through which they were selling these goods. In such a way they
started to earn millions of dollars. Such an injustice!